Transcripts: Bernanke was ‘uncomfortable’ with Bank of America bailout

Amid the financial crisis in January 2009, then-Federal Reserve Chairman Ben Bernanke told colleagues he was “uncomfortable” with providing extra aid to Bank of America. But he said he also wasn’t willing to draw a line on bailouts if it meant such a large firm failed, according to Fed transcripts released on Wednesday.

The 2009 transcripts – made public five years after the year ended – detail discussions that Fed governors and regional presidents held in private meetings about the economy, interest rates and bank bailouts.

The conversations shed light on the thinking of policy makers as they wrestled with ways to shore up a faltering economy and financial system. At one meeting, Bernanke labeled Bank of America and Citigroup – both recipients of multiple bailouts – as “problem children.”

On Jan. 16, 2009, Bank of America disclosed that the Fed and other U.S. agencies had crafted a $20 billion bailout to help stabilize the company in the aftermath of its purchase of investment bank Merrill Lynch. On that day, the Charlotte-based bank revealed that Merrill had lost more than $15 billion in the previous quarter and that the bank itself had lost $2.4 billion.

“We were a little disappointed in Bank of America’s monitoring in that they seemed a bit behind the curve in terms of following the developments at Merrill Lynch,” Bernanke said at the Federal Open Market Committee that morning. “But there were enormous losses at Merrill Lynch that emerged very quickly and that surprised Bank of America and us as well.”

Bank of America agreed to buy Merrill in September 2008 over the same weekend that the government scrambled to rescue investment bank Lehman Brothers, which ultimately filed for bankruptcy protection after no bailout materialized.

At the Jan. 16 Fed meeting, Bernanke explained that Bank of America’s then-CEO Ken Lewis had called a few weeks earlier to say that losses were mounting at Merrill and that it was “quite a shock.” The Fed chairman did not discuss how Lewis had proposed abandoning the deal before it was finalized, only to face stiff resistance from Bernanke and then-Treasury Secretary Henry Paulson.

‘They knew about it’

In the January meeting, Richmond Fed President Jeff Lacker, whose bank oversaw Bank of America and helped engineer the rescue, said there were press reports that the Charlotte bank only learned about the Merrill losses after shareholders approved the deal on Dec. 5, 2008. But Lacker said the losses had been accumulating since early November.

“They knew about it to some extent,” Lacker said.

In September 2012, Bank of America agreed to pay $2.43 billion to settle claims that it misled investors about the Merrill deal.

At the January meeting, Bernanke said Bank of America’s initial deal to buy Merrill was a “freely negotiated agreement” between the two banks.

“There was no government assistance, and there was no request for government assistance,” he said. “It was a commercial decision. At that time, we were actually quite happy to see it happen because we were concerned about the pressures on Merrill. But it was their decision, and we had no particular reason to think that there would be extraordinary losses in this case.”

In addition to $20 billion in capital, the bailout for Bank of America included an agreement to protect the bank from losses on a pool of bad loans and securities, modeled after a similar arrangement for Citigroup. Bank of America had already received $25 billion from the government, as part of a 2008 Treasury plan to buttress the balance sheets of big banks.

“I know President Lacker was uncomfortable with this arrangement,” Bernanke said. “I am certainly very uncomfortable with it. But for whatever reason, our system is not working the way it should in order to address the crisis in a quick and timely way. Until the reinforcements arrive, I don’t think we have much choice but to try to work with other parts of the government to prevent a financial meltdown.”

During the meeting, James Bullard, president of the St. Louis Fed, asked if there would be more deals like the ones reached with Citigroup and Bank of America.

“I am not going to draw the line somewhere that involves the failure of a firm the size of Bank of America,” Bernanke responded. “But that said, we need to find better solutions to this problem. …”

Richard Fisher, the Dallas Fed president who is retiring this month, asked Bernanke if the Fed, with its emergency assistance, was in essence subsidizing the creation of even bigger banks through mergers.

“It is clear that, on the one hand, we are seeing a consolidation of firms and some increase in concentration,” Bernanke said. “At the same time, the industry overall is shrinking and needs to shrink, and that is going to be a structural problem going forward.”

Bernanke said there needed to be a “wholesale policy response” addressing “too big to fail” – the notion that some banks are so big they must be bailed out when they get into trouble to avoid damage to the rest of the financial system.

“That could involve breaking up firms,” he said. “It could also involve a tougher regulatory regime for so-called systemically relevant firms.”

Scrutiny came with aid

For Bank of America, the 2009 bailout would help stabilize the company but also produce intense scrutiny of how the bank handled the Merrill deal, including high-profile congressional hearings. Lawmakers would debate whether the bank pressured regulators to provide aid or whether regulators forced the bank to go ahead with a toxic deal.

By the end of 2009, Bank of America had paid back all of its bailout money and canceled the loss-protection agreement, which was never finalized. Lewis retired at the end of the year and was replaced by Brian Moynihan, who took steps to sell off assets and simplify the bank.

This story was originally published March 4, 2015 at 12:18 PM with the headline "Transcripts: Bernanke was ‘uncomfortable’ with Bank of America bailout."